Q3 2024 AAON Inc Earnings Call
Thank you.
Speaker Change: Good afternoon, ladies and gentlemen, and welcome to the AON, Inc. third quarter of 2024 earnings release conference call. At this time, all lines are in listen-only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session.
Speaker Change: If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, November 7, 2024. I would now like to turn the conference over to Joseph Mondillo, Director of Investor Relations.
Joseph Mondillo: Thank you, operator, and good afternoon, everyone. The press release announcing our third quarter financial results was issued after market closed today and can be found on the corporate website aaon.com. The call today is accompanied with a presentation that you can also find on our website as well as on the listen-only webcast.
Joseph Mondillo: Joining me on today's call is Gary Field, CEO, Matt Tobolski, President and COO, and Rebecca Thompson, CFO and Treasurer.
Please turn to slide two.
We begin with our customary forward-looking statement policy.
Joseph Mondillo: During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1955, the Securities Act of 1933, and the Securities and Exchange Act of 1934, each as amended.
Joseph Mondillo: As such, it is subject to the occurrence of many events outside of AANN's control that could cause AANN's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks, and uncertainties in making predictive statements.
Joseph Mondillo: Our press release and Form 10-Q that we filed this afternoon detailed some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have the duty to update our forward-looking statements.
Joseph Mondillo: Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation.
With that, I will turn the call over to Gary.
starting on slide 3.
The third quarter was another solid quarter for Aion.
Joseph Mondillo: Total revenue grew year-over-year 4.9% and diluted earnings per share was up 8.6%.
Both strong results for the quarter.
Joseph Mondillo: Gross margin contracted 230 basis points versus the comparable quarter a year ago.
Joseph Mondillo: We maintain that gross margin in the mid-30s is very healthy for this business.
Joseph Mondillo: In fact, the gross margin this quarter represented one of the strongest quarters in the company's history.
Joseph Mondillo: Likewise, adjusted EBITDA margin of 25.3% marked the third strongest quarter in company history.
Joseph Mondillo: Overall, our operations have been performing well, which is reflected in these results.
Joseph Mondillo: From a demand perspective, bookings in the third quarter were up year over year in the mid-single digits, and year-to-date they were up approximately 27 percent.
Demand for data center equipment remains strong.
Joseph Mondillo: Backlog at the Aon Coil product segment at the end of the quarter was a segment record up approximately 63% from a year ago and backlog at the basic segment finished close to record levels up over a hundred percent from a year ago.
Joseph Mondillo: A significant portion of the total backlog at the end of the quarter consisted of orders of data center equipment.
Joseph Mondillo: Furthermore, subsequent to the end of the quarter, we received approximately $174.5 million of orders that by and large will be produced in the first half of 2025.
Joseph Mondillo: We addressed this in a press release that we issued two weeks ago.
Joseph Mondillo: These orders are associated with a liquid cooling solution for one data center customer and will be produced at our Longview, Texas location.
Joseph Mondillo: In addition to these orders from this one customer, the pipeline of opportunity is very robust.
Speaker Change: While this was a big win for Aon, we foresee much more demand within the data center market going forward. Aon is becoming a leading player in the data center cooling market as a fully capable provider of highly engineered, energy efficient solutions for its customers.
Speaker Change: With that, I will now hand it over to Matt Tobolski who will speak more in depth about our operational strategy.
Matt Tobolski: Thank You Gary. Over the last several years AON has been undergoing a significant transformation and as we have addressed in recent calls this has continued through this year.
Matt Tobolski: Nearly all departments of the enterprise have been undergoing some degree of change to help position the company to sustain long-term growth at the rates and efficiency metrics we are targeting.
Matt Tobolski: At the same time, strong demand of data center equipment and external market factors associated with a slowing non-residential construction sector and a refrigerant transition have consumed and challenged the operations.
Matt Tobolski: All things considered, I could not be prouder of how the operations executed in the third quarter in year date.
Matt Tobolski: The margins we have been able to record, which are at historically high levels, support my preconceived notion that the team has been operating at a very high level.
Please turn to slide 4.
Matt Tobolski: As we have spoken to this year, Aon is emerging as a prominent player in the data center space.
Matt Tobolski: Year-to-date through the first three quarters, bookings of equipment associated with this market have nearly doubled and made up nearly 30% of total company bookings.
Matt Tobolski: This compares to data center bookings in the same period in 2023, making up about 13% of total bookings.
Matt Tobolski: factoring in the 174.5 million dollars worth of orders that we've received in October, this showcases the level of prominence the data center market has within the Aon business.
Matt Tobolski: The success that we have had thus far in the data center market is a testament to various factors.
Matt Tobolski: The team collaboration across the enterprise is an integral component. Over the last year, we have taken steps to integrate various divisions of the company to leverage proficiencies and best practices and to increase the efficiency of the overall business.
In addition, this highlights AEON's superior engineering competencies.
Matt Tobolski: The orders we received in October were related to a highly custom-designed liquid cooling solution. The bidding process of these orders were competitive and really challenged our engineering team. At the end of the day, it came down to who was able to design and manufacture the most ideal solution for this customer.
Speaker Change: Aon's customer-centric, solutions-based approach is unique to the industry and has been critical to our success.
Speaker Change: We value our customer relationships and strive to create strong, long-lasting partnerships.
Please turn to slide 5.
Speaker Change: Another critical component to our execution in the data center market is related to expanding production capacity to meet the growing demand. The data center market is in the early stages of a multi-year growth cycle driven by cloud computing in artificial intelligence demand.
Speaker Change: Supported by our strong customer relationships and high visibility into invested capital and detailed construction plans, our confidence of sustainable demand is high.
Speaker Change: The orders that we received to date represent a fraction of the overall pipeline of opportunity. We are committed to our customers in meeting their demands by increasing our production capabilities, while at the same time balancing our risks appropriately.
Speaker Change: This year, we have been managing two significant capacity expansion projects.
Speaker Change: The first has been in our basic segment in Redmond, Oregon.
Speaker Change: There, we expanded the square footage by approximately 15%. We also reconfigured much of the manufacturing layout in the existing footprint, while at the same time adding new production equipment, all of which has added production capacity and will lead to greater efficiencies.
Speaker Change: We are on schedule to complete this expansion project by the end of this year with production to commence in early 2025.
Speaker Change: The equipment associated with the $174.5 million worth of orders that we received in October will be built within our Longview facility.
In addition to the expansion project to these two locations,
Speaker Change: We have entered into a definitive agreement to acquire a new 787,000 square foot facility in Memphis, Tennessee.
Speaker Change: This investment will largely accommodate incremental production of data center equipment. We also intend to move production of some of our larger, more unique equipment that we currently manufacture in Tulsa to this location, which will in turn free up space in Tulsa, further delaying any immediate expansion needs of that location.
Speaker Change: At the same time, this provides additional geographic diversification, which will mitigate certain operational risks and help better serve our data center customers.
Speaker Change: We expect this facility will be up and running by the end of 2025. All in, both the pipeline of opportunity within the data center space and our confidence of the market has never been greater. The investments we are making in capacity, people, products, and customer relationships will generate attractive returns and growth.
Please turn to slide 6.
Speaker Change: Turning to our more traditional commercial HVAC business, the Aon Oklahoma segment. This segment continued to perform well in the third quarter. Although sales and profits of this segment were down year over year, this is expected largely because of the tough comparison to the year ago period.
Speaker Change: Versus the second quarter of this year, sales and profits were comparable.
Speaker Change: which was in line with our expectations and consistent with historical seasonality.
Speaker Change: This year, volatility in bookings has been greater than previous years, largely associated with the refrigerant transition and softening macro environment.
Speaker Change: While we did realize a modest increase of orders in August and September leading up to our phase out dates of R-410A equipment, the benefit was not nearly as pronounced as what the industry experienced.
Speaker Change: A lot of the industry manufactures standardized equipment that is inventory within a distribution channel and sold to an end-user at a later date. This differs from Aon's strategy in which we manufacture semi-custom, built-to-order equipment and as such we did not see much of a pre-buy.
Speaker Change: We think we could see a near-term low in demand as customers transition to equipment configured with the new R454B refrigerant.
Speaker Change: Furthermore, the new construction market remains soft and could take some time to turn around. As such, we expect the fourth quarter and possibly the first quarter of next year to soften the segment.
Speaker Change: As we progress beyond the immediate near-term headwinds, we anticipate demand will accelerate throughout next year.
Speaker Change: We expect the macroenvironment will improve with interest rates falling and the election being behind us, plus the refrigerant transition will have played out. Regarding pricing, we anticipate a very modest amount of pricing next year, which is very different than what we are hearing from the rest of the industry.
Speaker Change: Finally, our product remains best positioned to support secular trends associated with decarbonization, electrification, and future regulations.
Speaker Change: Therefore, while this segment could see a more pronounced softening in the fourth quarter and first quarter than we normally do in these seasonally downed quarters, we feel very good about the medium and long term at the Aon, Oklahoma segment.
Speaker Change: And with that, I will hand it off to Rebecca to walk you through the financials.
Thank you, Matt. Please turn to slide 7.
Rebecca Thompson: Net sales for the quarter increased 4.9% to a record of $327.3 million, up from $312 million in the third quarter of 2023.
Rebecca Thompson: The year-over-year growth is largely driven by the Basics and Aon Coil Products segments, which realize growth of 58.8% and 36.7% respectively, primarily related to the data center market.
Sales at the Aon Oklahoma segment declined year-over-year 7.1 percent.
Rebecca Thompson: The year-over-year decline of this segment largely reflects the tough year-over-year comparison along with the previously discussed disruptions caused by the refrigerant transition.
Moving to slide 8.
Gross profit decreased 1.7% to $114.2 million from $116.1 million.
Rebecca Thompson: As a percentage of sales, gross profit was 34.9% compared to 37.2% in the third quarter of 2023. The contraction in gross margin was a result of lower volumes at the Aon, Oklahoma segment and temporary inefficiencies at Basics.
Rebecca Thompson: Partially offset by strong results at the Aon Coil product segment, which benefited from a favorable product mix and increased efficiencies.
Please turn to slide 9.
Rebecca Thompson: Selling, general, and administrative expenses decreased 5.5% to $48.6 million from $51.5 million in the third quarter of 2023. As a percent of sales, SG&A decreased to 14.9% from 16.5%.
Rebecca Thompson: Overall SG&A's percent of sales continues to be elevated due to depreciation and increased investments of back office technology and automation.
Rebecca Thompson: Professional fees decreased due to the absence of the one-time $7.5 million settlement that occurred in the same period of 2023.
Moving to slide 10.
Rebecca Thompson: Our tax rate in the quarter was 18.4 percent. The company's estimated annual effective tax rate, excluding discrete events, is expected to be approximately 24.9 percent.
Rebecca Thompson: Turning to slide 11, our balance sheet remains strong with a current ratio of 3 to 1.
Rebecca Thompson: Cash equivalents and restricted cash totaled $6.7 million on September 30, 2024, and debt at the end of the quarter was $55.7 million. Our leverage ratio was 0.19.
Rebecca Thompson: Year-to-date cash flow from operations was $191.7 million, up from $107.1 million in the comparable period a year ago. The year-over-year improvement in year-to-date cash flow from operations reflects more efficient inventory management.
Rebecca Thompson: Capital expenditures for the first three quarters of the year, including expenditures related to software development, increased 37.3% to $113.8 million.
Rebecca Thompson: We also drew down $17.3 million on our revolving line of credit over this period, largely to finance the $100 million of open market stock buybacks in the second quarter.
Rebecca Thompson: In the third quarter, we reduced the balance by $30.2 million.
Rebecca Thompson: Overall, our financial position is strong. This gives us flexibility and allows us to continue fully focused on investments that will drive growth and generate attractive returns.
Rebecca Thompson: For 2024, we now anticipate capital expenditures will be $215 million, up from our previous expectation of $125 million.
Speaker Change: With that, I'll now turn the call back over to Gary.
please turn to slide 12.
Gary Field: As we approach the end of the year and begin to shift our focus to 2025, we are very pleased with the current trajectory of the company. While the traditional rooftop business has faced multiple headwinds this year, and we expect it could soften more in the immediate near term, our data center business is more than compensating.
Gary Field: We estimate at the end of this year, we will be entering 2025 with a backlog up over 50% from a year ago.
a vast majority of which will be converted in 2025.
Gary Field: This compares to a year ago when we were entering this year with a backlog that was down year over year, approximately 6.9%.
Gary Field: Our data center business is clearly very strong. This is a rapidly evolving market and all considered, we're executing extremely well with product development, customer service, production, and management of our capacity.
Gary Field: On the traditional HVAC equipment side of the business, it's hard to be nearly as positive compared to data center. Nonetheless, we remain optimistic.
Gary Field: We manufacture the highest quality, highest performing, most efficient rooftop units in the industry.
Gary Field: Furthermore, as the industry attempts to improve the quality of their equipment, it has increased their cost of manufacturing, resulting in us becoming more cost competitive.
Gary Field: This year we have generated the highest gross margins in AON's history while managing a price premium to market pricing at the lowest level in company history.
Gary Field: We also continue to maintain our edge in product development and innovation as noted in previous discussions regarding our heat pump technology.
Gary Field: Our rooftop units configured with this technology have been growing at very robust rates this year. Thus, we are very optimistic with both sides of the business.
Gary Field: Lastly, before getting into Outlook and opening up the call for Q&A, I want to take a step back and view things from a broader perspective.
Gary Field: Aon is positioned for growth to accelerate in a transformative way over the next 12 months, and that is very exciting.
Gary Field: This kind of growth can come with risk, including long-term sustainability or operational efficiencies.
It's not handled properly.
Gary Field: We are focused on building an organization with the proper structure and leadership that will mitigate these risks and ensure long-term sustainability and success.
Gary Field: In tandem with managing the day-to-day opportunities and challenges that we have experienced this year, we are tactically restructuring the organization in a way to best manage the enterprise over the next several years.
Gary Field: From a high level, we are restructuring leadership and the business and modifying processes throughout the organization.
These initiatives will ensure that we are maximizing efficiency.
Gary Field: minimizing risk and maintaining high returns on invested capital while the company is growing at a high rate.
Gary Field: You'll hear more about this in the near future, but I wanted to make all shareholders aware that we are not taking this near-term growth for granted, and we are investing in the long-term sustainability for this business.
Gary Field: For our 2024 outlook, we maintain that our volume will be flattish and pricing will be a mid-single-digit contributor.
Gary Field: We also maintain that our gross margin for the year will be up year-over-year, but to expect this to reflect typical seasonal softness in the fourth quarter.
Gary Field: For SG&A as a percent of sales, we maintain that it will increase 50 to 100 basis points.
Gary Field: Finally, we increased our CAPEX guidance to $215 million, up from $125 million, reflecting the recently announced Memphis Project.
Gary Field: As we progress into 2025, considering the timing of backlog conversion and accounting for the near-term softening in the non-residential construction market, we expect Q1 sales and earnings will be modestly down from Q4.
Gary Field: Moving forward through the rest of the year, we anticipate an acceleration of year-over-year growth in both sales and earnings.
Gary Field: In closing, I want to finish by thanking all of our employees, sales channel partners, and customers. Thank you.
Speaker Change: To our shareholders, this company has never been more well managed than it is today and we look forward to generating the returns that you expect of us. I will now open the call for Q&A.
and the other one.
Speaker Change: Thank you ladies and gentlemen. We will now begin the question and answer session. Should you have a question please press star followed by the one on your touchtone phone.
Speaker Change: You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys.
Speaker Change: One moment please for your first question. Your first question comes from Ryan Merkel with William Blair. Your line is now open.
Ryan Merkel: Hey thanks, good afternoon and thanks for taking the question. I guess first off wanted to start with the Oklahoma segment and Gary you've talked about the slowdown kind of all year and I guess we're seeing it and my question is
Ryan Merkel: Should we expect revenue in the Oklahoma segment to be down more than the 7% we saw this quarter? Or what do you mean by seeing a slowdown in 4Q and 1Q?
Speaker Change: For the last few years, we've had such a tremendous backlog because we didn't have production capacity.
Speaker Change: and we weren't able to produce in the shorter lead times. Now we're able to produce at a much faster rate, so the backlog impacts it substantially.
Speaker Change: So there could be just a slight bit more softening Q4 and Q1 because the backlog is, again, we've burned it down pretty good. But the pipeline is very strong. Sales channel partners tell us things are beginning to turn around.
Speaker Change: I had cited three reasons that I felt like the pipeline for that business was challenged. The refrigerant transition, the election, and interest rates. Well...
elections behind us.
Speaker Change: I think we did fine there. Interest rates went down another 25 basis points today. I think that points well and the refrigerant transition will be behind us, you know, any moment now. I mean, we cannot produce equipment past December 31st with the old refrigerant.
Speaker Change: And since we don't have any of our equipment going into inventory like a distributorship.
Speaker Change: then we are already shipping 454B equipment and we will be shipping exclusively that. So I think, you know, just the timing of these events has been pretty much the way I projected going back a year ago.
Hopefully that answers what you were looking for.
Speaker Change: Yeah, it does. And a quick follow-up, because you said that you think 1 to 25 earnings will be down year-over-year. Is that, again, due to the Oklahoma business and some of the softness we're talking about, or is there anything in there for data centers?
Speaker Change: Oh, the data centers is very robust, the data centers, you know, the thing is there.
Speaker Change: The Longview facility, in order to produce that at the rates to make up for the slowing down in Oklahoma, it's just coming online, you know, here in a few weeks. So, I don't expect to flip the lights on and produce at 100%.
Speaker Change: capability right away. So I think it'll take a quarter to speed that up.
Speaker Change: And Ryan, just to clarify, we don't anticipate a year-over-year decline in Q1. We're messaging a potential quarter-over-quarter decline from Q4 to Q1, which is a modest decrease from Q4 to Q1. But it will be up year-over-year.
Speaker Change: Okay, thanks for that clarification. And then let me ask one on data centers before I turn it over. The $175 million order, which I appreciate is not in the backlog, by the way, why was that order so big?
And was that a new customer?
Speaker Change: So it is an existing customer, but with this specific customer, it is the.
Speaker Change: Matthew Sokolski, who was on the final chat with my folks as they were presenting about this excellent article and the encouragement that there is healing with coca-cola in the flight industry. So the next part of the presentation, I'll hand it back to Matthew, although David on myself will be going over some things as well. Thank you for being on here.
Speaker Change: It's not a single facility, but it's providing product to support a large build-out of AI capacity across the overall enterprise for that customer.
and just me.
And one thing I would just note is...
Speaker Change: You know, we obviously messaged the $174 million order, but, you know, even subsequent to that, I mean, the last week we've tallied on another $34 million in liquid cooling orders as well. So the demand around liquid cooling and the kind of strength with the product development continues to kind of showcase the value that AM provides.
Speaker Change: And that that leads to my last question here is you say that that order is a fraction of the pipeline I think a lot of us are wondering are there other big chunky orders out there that you have visibility to you know in the Hundred million dollar area or should we not be thinking about it that way? There's just a long pipeline of lots of kinds of orders
Speaker Change: But I would just say, I mean, we have tremendous visibility into numerous orders that are, you know, 20 plus million dollar orders.
Speaker Change: within the liquid cooling and air side space. So the fundamental volume is, you know, large orders. The $174 million certainly is one large tranche that's pretty unique, but in aggregate, we have, you know, substantially more visibility in pipeline to kind of overall order volume.
Very good. Thanks so much. Appreciate it. Pass it on.
Your next question comes from Chris Moore with CJS Securities.
Your line is now open.
Speaker Change: Good afternoon, guys. Thanks for taking a couple. Maybe just one on the rooftop and just have all the states pass the necessary legislation for the new refrigerants.
Speaker Change: At this point, the regulations are supporting the refrigerant transition. We're less than two months away from the mandatory cutover date, so from a regulation standpoint, the states are prepared for that January 1st date.
Speaker Change: Got it. And I know this is probably a difficult one, but...
Speaker Change: parse the air-cooled versus liquid-cooled, and any sense as to what percentage of the data center revenue would be on the liquid-cooled side?
It's going to be a transition for sure.
Speaker Change: It's not going to be day one, all of a sudden we flip a switch and have this massive liquid cooling kind of turnover.
Speaker Change: So, you know, three to four years out, you're really still going to be predominantly airside cooling. But I want to frame one thing up as well. When you think about liquid cooling, a pure play liquid cooling data center still has a substantial amount of air cool requirement. I mean, 20 plus percent. So.
Speaker Change: Just mathematically speaking, it's still, even if you went to a today, you know, flip the switch and all that new demand with liquid cooling, the demand is growing so much that the airside cooling is still growing in that backdrop. So, when we look at a, you know, three to four years out.
Speaker Change: You might be approaching 40-50% of the overall cooling demand being around liquid cooling if the investment cycle continues around the AI-ML investment.
Got it. That makes perfect sense.
Speaker Change: and one more just on the the gross margin or basics 27.9% obviously down significantly year-over-year you're still building out capacity
Speaker Change: you know looking as you as you as you get there and volume starts to ramp do you expect the basics gross margin to be the highest of the of the three segments?
Speaker Change: I don't know if I go as far to say the highest of the three segments, but I think the Oklahoma segment provides a good target of where we're trying to work towards within the basic segment.
Speaker Change: In your comment on the Q3 numbers, not only the build-out of capacity, but if you imagine kind of all our talk around the investments we're making within Longview and talking about the Memphis facility and that build-out.
Speaker Change: The goal is to really start leveraging a geographically diverse manufacturing fleet.
Speaker Change: And so, as we start to leverage that, we can really optimize manufacturing efficiency and drive margins at those sites.
within the Oregon site today.
Speaker Change: The volumes going through there, you know, it requires a tremendous amount of collaboration, but also some outsourcing that puts pressures on margin, where once we get the manufacturing fleet kind of fully in operation, that outsourcing really starts to kind of pull back and allows us to really insource as much as possible, getting that kind of additional tailwinder on margin.
Perfect. Thanks Matt. I will leave it there. Thanks guys.
Speaker Change: Your next question comes from Brent Thielman with DA Davidson. Your line is now open.
Brent Thielman: Hey, good evening guys. Congrats on all the activity here. I wanted to come back to, you know, just thinking about the sheer magnitude of things you've got, orders...
Brent Thielman: and you know we're going to be revenue in here in the next few quarters but I was thinking about your comment that you may be down into the first quarter on a sequential basis on the basis
Brent Thielman: Does that mean the bulk of this new order is going to revenue in the second quarter? I'm just trying to understand how this is going to sequence over the first half of the year.
Speaker Change: Great question. When you think about the historic seasonality we have in the rooftop business,
Speaker Change: coupled with the kind of macro and secular dynamics that are happening right now.
Speaker Change: The Oklahoma segment certainly is having downward pressures, Q4 and Q1.
being offset by the ACT and BASIC segments.
Speaker Change: Well, when we talk about the kind of growth and revenue in that backlog, it definitely is accelerating quarter over quarter. And so you're going to, when you think about Q1 to Q2, you've got the seasonality softening on the Oklahoma segment that's providing an uplift in revenue.
Speaker Change: add on top of that the acceleration of conversion of that backlog around the data center space and and certainly that's where Q2 is going to have a you know substantially stronger performance compared to Q1 from a top-line revenue perspective.
Yep.
Matt Tobolski: Matt, what about just the core basics business, especially as you wrap up the projects there at that facility? You know, how do you sort of think about the sequencing of revenue from there? Is it going to take some time to work through the kinks?
Matt Tobolski: Just curious, it would seem to me you've got a pretty full pipeline there.
Speaker Change: Yeah, so one thing to consider, and this is something that, you know, as we go forward, we really have to start thinking about basics differently than we think about it today. And the reason I say that is the basics brand is truly going to leverage the geographically diverse manufacturing fleet.
Speaker Change: So when we talk about basics today, you know, it's tied to Redmond.
Speaker Change: The walls are only so big within that Oregon facility And so we naturally hit kind of a point where that facility is at its Revenue kind of cap and we focus on at that point driving efficiency and basically margin up step kind of from there
Speaker Change: But when you think about BASICS as a whole, our big intention with the Longview expansion, with this Memphis project, it is to be manufacturing that BASICS-branded product.
across that area. And so we may intentionally move
things that are in Basic Backlog today.
to be manufactured at one of those other facilities.
Speaker Change: to optimize the manufacturing fleet and really drive manufacturing efficiency going forward.
It's kind of a, you know...
Speaker Change: The true root answer to your question is basics as a whole is going to really be seeing strong acceleration.
leveraging that diverse manufacturing fleet.
Speaker Change: The today style of reporting of basics is obviously only can only grow so much within our geographic walls in Redmond until we kind of help
Speaker Change: you know, further provide the explanation of basics going forward. And so that's definitely from a reporting perspective, something we're very cognizant of, is really identifying the true basics revenue that's manufactured across the fleet.
Appreciate it. Hey, I guess my last one is.
Speaker Change: you know understanding you've got a little bit of a lull here in the rooftop business in the short term. I guess my question around it is is any of this induced
Speaker Change: by the refrigerant change or is this really just kind of a consequence more of look you know there's there's a lot of things going on in the end markets right now and customers are just taking a step back.
I think all three factors that I've been
Speaker Change: talking about for in excess of a year now are pressuring the rooftop business.
Speaker Change: The refrigerant transition is certainly one of the larger of those.
Speaker Change: I think the interest rates have kept construction starts down. You know, if we look at ABI, it's been down for like 20 months in a row or something like that. So...
Once these interest rates
Speaker Change: The impact of them lowering the interest rates starts to materialize into you know more starts be more opportunities and The refrigerant transition will be behind us here shortly so that the headwinds don't seem to have a whole lot of duration to them
Appreciate that, Gary. I'll pass it on.
Speaker Change: Your next question comes from Timothy Rosewood-Baird. Your line is now open.
Timothy Rosewood-Baird: Hey everybody, good evening. Nice job. Maybe just, I want to dig on one point that you said in the press release, so bear with me, there's a little bit of math, but over half of your backlog right now is for data centers.
Timothy Rosewood-Baird: and that's going to be produced and shipped in 2025. So if I just use 51 percent of that, that implies 325 million or so of that backlog is going to be for data centers in 2025.
Timothy Rosewood-Baird: And then, if we add the $175 million order you announced in October,
Speaker Change: you know, that adds up to at least $500 million in data center revenue next year. So, I guess, is that mass, right? And I guess if it is, just how do you kind of set up from a capacity perspective to just kind of make sure that you can handle that type of growth?
Yes, so one thing I'll touch on, just with the...
Speaker Change: The data center backlog that is there today, there is still a portion of that that will be manufactured past 2025. So we have some stuff in our backlog that's going to be 18 months out. So not all of that is going to convert for what's in backlog today in 2025.
So.
Speaker Change: While not providing direct guidance, I'll just say your sentiment and what you're thinking is certainly, you know, in the realm of kind of what we see within the data center space going forward.
Speaker Change: And when we look at, you know, how do we support that? I mean, it's a fantastic question when you think about, you know, that's tremendous growth around that segment. And then managing that from a manufacturing and efficiency perspective is critical.
Speaker Change: So we've already wrapped up the fundamental Redmond project is wrapped up We're still doing some work in Oregon But the big stair step of that investment is wrapped up and is now producing product
Speaker Change: So that was a 15% gain in square footage, which has some more headroom compared to overall revenue, not a one-to-one square footage to revenue.
Speaker Change: We go to the Longview site, and by the end of the year, we'll have that wrapped up. We're already setting up and actually priming production lines within that facility today.
Speaker Change: So when we hit 2025 and that facility is turned over, you know, we're sequentially bringing those production lines on throughout the calendar year, which is providing a tremendous amount of additional capacity.
Speaker Change: And right as we're sitting there in Q3 is when we anticipate really starting to be able to get some inertia within the Memphis facility.
Speaker Change: in producing product kind of in earnest towards the latter half of the year in 25. So.
Speaker Change: All that to say, that capacity from an investment perspective, really from today throughout the end of 2025 is going to be a continuous increase in capacity throughout the calendar year that's going to really allow us to support that bookings growth.
Speaker Change: Okay, okay, that's really helpful, thanks. I guess on Oklahoma, you know, Gary, just kind of, if you can maybe just talk a little bit about the decision to maybe put through a little less price.
Speaker Change: than your competitors are doing? Because by my math, I mean, you effectively won't have much of a premium now, at least on an initial cost basis.
Well, one of the things to...
Speaker Change: to take note of is several of our competitors have announced that they're building inventory to put in their distributor channel.
That is 410-A.
Speaker Change: and one of those competitors stated that they could be putting new 410A equipment in for about nine more months.
Speaker Change: So, while that's still out there, we're not going to see the real price difference because they're not getting a preponderance of 454B equipment out there yet.
Speaker Change: So it's not going to be instantaneous that we see this glaring difference in pricing show up. It's going to take a quarter or two. We're monitoring it very closely. When we have competed with
Speaker Change: the others on 454B, we have found them to be much closer to our price or above our price.
Speaker Change: So, you know, I just I want to get the momentum back into this business and and not
try and
Speaker Change: get the margins out of line. You know, the margins are very, very good right now, and we've produced enough 454B equipment already to know that our margins are solid on it as well.
Speaker Change: So, we will be monitoring that, Tim. I don't want to leave money on the table. Our equipment is definitely a value statement that is easily defined, and we intend to get paid for the value.
Speaker Change: Okay, okay. No, no, it's helpful. I understand that. Okay, good. Thanks guys. Appreciate it. See you next week.
Speaker Change: Ladies and gentlemen as a reminder should you have a question please press star 1. Your next question comes from Julio Romero with Jody Company. Your line is now open.
Thanks. Hey, good afternoon, everyone.
The...
Speaker Change: Could you give us some flavor in terms of the margin profile of that $175 million liquid cooling order, and is it fair to assume that order is going to be part of the coil segment or would it be Basics?
Speaker Change: Yeah, so from a margin perspective, I would just say, I mean, it's going to be in line.
Speaker Change: with what we historically have seen in the basic segment, kind of before all the disruption.
Speaker Change: Obviously there's this opportunity to get margin expansion kind of given that volume, the manufacturing efficiencies that come with that. There provides headroom in there but
Speaker Change: You know, we're not guiding they're going to be, you know, as strong as kind of what we've been posting in the Oklahoma segment, just because there's going to be pressures on that margin during the initial ramp up.
Speaker Change: and then as we get into a steady state there's going to be opportunity for actually some upside. So I would use kind of a 2023 basics margin profile as kind of a rough expectation of really where we expect to see that come and yes it will that revenue will show up in our reporting within the COIL product segment.
Speaker Change: Okay, got it. So 2023 basics margin, but wouldn't the majority of that order be be kind of in one quarter in 2Q, as you said earlier, or?
Or am I not thinking about that correctly?
Speaker Change: It'll ramp up, I mean, you'll see that revenue kind of sequentially, realistically, even a little bit in Q4, so you'll see it kind of in Q4, ramp up in Q1, and then ramp up more in Q2. So it'll be sequential, but certainly there's going to be a high density of that sitting in Q2.
Speaker Change: Okay, got it. That obviously is going to provide some margin upside just around leverage.
Speaker Change: Gotcha, gotcha there. And then on the new production facility in Tennessee, you said you expect to have it running kind of towards end of year 25. Can you just give us an idea of kind of the expected contribution of that facility on an annualized basis?
Speaker Change: It certainly has a lot of room to really impact the revenue within AON. We haven't really put to paper, publicly at least, where the revenue potential is.
Speaker Change: What I would just say is if you step back and think about what does 787,000 square feet mean relative to the data center footprint that exists inside Aon today, and it's roughly doubling the available square footage to produce data center products.
Speaker Change: And so that's kind of the guidance we're giving is if you look at that and look at Redmond, you look at the ACP site with the expansion all in, you're getting roughly.
Speaker Change: a doubling of that square footage to be able to kind of revenue bids on our products going forward. So there's definitely upside to be able to really impact the market with that coming online.
Speaker Change: Good context there and maybe getting ahead of myself, but is that going to be also a coil segment?
facility, or would it be different?
Speaker Change: So near term it will likely report into Oklahoma, but obviously in the long term we're going to work through reporting to be able to clearly articulate the basics versus Aon segments from their impacts to the enterprise as a whole.
Speaker Change: Understood. And then just one more for me, if I could.
Speaker Change: Rebecca, you said earlier that the annual tax rate, effective tax rate for this year is expected to be 24.9, so does that imply kind of a high 30s tax rate we should be looking at for the fourth quarter?
No. No. So the anal.
Speaker Change: Each of the quarters reflects discrete events, mainly our excess tax benefit that lowers it below the 24. So ...
Speaker Change: It won't be like year-to-day you take 24% and back out, you know to get a higher rate in fourth quarter It'd be 24. I assume
Speaker Change: will have another excess tax benefit in Q4. So it might likely end up less than 24 when you add in some of those discrete events. So you would look at your fourth quarter results times that 24 tax rate and factor in what discrete events could be.
Speaker Change: Okay, good clarification there. Thanks very much, guys. I'll pass it on.
Thank you.
Speaker Change: I'd like to thank everyone for joining me on today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to myself. Have a great rest of the day, and we look forward to speaking with you in the future. Thank you.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.